XMFSinchiruna (27.42)

Sinchi Alert: Industrial indicators offer a window into 2009

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I've just completed four articles in a row developing a topic that I believe will be relevant to shaping how 2009 may play out. There are so many factors at play around the world right now that I guess anything could change, but for now it looks as though Asia is preparing to gear through the short-term disruption of industrial demand by maintaining or even expanding production capacity in some very key sectors.

POSCO's announcement of a 75% increase in 2009 capex over 2008 to build new steel mills, combined with Baosteel's expansion and $8.8 billion capex, collectively signal a watershed event in the greater-Asia industrial complex. China and Korea are running full steam ahead for industrial growth, and I believe both see this growth coming in large measure from the Chinese stimulus plan. Oddly, $586 billion almost doesn't sound like a lot of money these days. :) But I assure you, it is ... and it's real.

1. First, the truly historic depth and abruptness of worldwide cuts to raw material production and development budgets signals the potential for an overshoot of actual demand erosion.

2. Cliffs Natural Resources reduced production rates at its North American iron ore mines by 39% (which primarily was sold to domestic U.S. steelmakers). Vale and Rio Tinto both make cuts as well. Steel production in U.S. clearly is in contraction mode.

3. All the same, Nucor indicates demand destruction may not have been as bad as many are presuming, stating that only half of their anticipated sales decline relates to actual demand destruction.

4. POSCO and Baosteel, two of the biggest steelmakers in the world, sound the alarm that Asia is gunning for growth. Their actions signal an expectation that shipbuilding activity will persist in Korea despite widespread concerns over mass-cancellations of orders. Lingering demand for new ships, even after the perfect storm (previous link) hit shippers, also signals an expectation of robust commodity demand from ... where else, but China. This reinforces the notion, once more, that the Chinese stimulus plan needs to be taken seriously (along with a reasonable expectation of domestic stimulus packages to be pursued by many additional nations to combat deteriorating financial conditions).

I believe the evidence in sum points to a brief stay at present commodity prices as producers around the world will be shown to have over-responded to the immediate downturn before taking an accurate measure of where Asian demand would land. China could not sit idly by and watch global production pipelines continue to be slashed when those resources may yet be required to fuel Asian industry. I believe the reversal of that weird dollar rally and the emergence of negative Treasury yields will mark a concerted resumption of the still-surviving, though nearly defeated long-term secular bull market in commodities. I expect massive volatility in the sector, but still a resumption of the trend. A reversal in posture from another sector like Aluminum (for instance CHALCO recommissioning some capacity) would provide some further confirmation.

I agree. There is going to be so much 'infrastructure' spending thorughout the world to re-stimulate the various economies that raw material demand will overwhelm supply. Should be an interesting start to the new year. Thanks for the post :)